Commodity Money

Published Dec 28, 2022

Definition of Commodity Money

Commodity money is a form of money that is based on a commodity with intrinsic value. That means it is a medium of exchange that is backed by a physical asset, such as gold or silver. This type of money was used in many societies before the introduction of paper money and coins (i.e., fiat money).

Example

To illustrate this, let’s look at the example of gold. Gold has been used as a form of money for centuries. In the past, gold coins were used as a medium of exchange in many societies. People would exchange goods and services for gold coins, which could then be used to purchase other goods and services. This worked because the gold coins themselves were valuable, durable, did not decay with time, and could easily be exchanged.

The value of the gold coins was not determined by the government or any other centralized entity but by their intrinsic value, as they could always be used to make other valuable products, such as jewelry. In that sense, this type of money was more like an actual good that could also be used as money.

Why Commodity Money Matters

Commodity money is important because it provides a stable and reliable form of money. This is because the value of the commodity is not subject to the same fluctuations as paper money or coins. That means it is less likely to be affected by inflation or other economic factors. As a result, commodity money is often seen as a more reliable form of money than paper money or coins.